‘Perfect storm’ brewing around public sector pensions

MPs have warned that a “perfect storm” is brewing around public sector pensions, as nearly a quarter of a million workers have opted out of their pension schemes due to rising living costs, according to the Commons Public Accounts Committee.

It said that the Treasury seemed to be “unconcerned about the drop in enrolment by some workers”, even though this may end up costing the taxpayer more in the long run.

The Committee warns on the “danger of a perfect storm where some young people believe they cannot afford pension contributions because of high costs of living and retire with a reduced public sector pension as a result”. It says many younger workers will continue to pay rent in retirement because they cannot afford to buy a home and the cost of supporting this generation “will fall on future taxpayers”.

Reform for public sector pensions

The report also talks about the impact of the Treasury’s attempt to reform public sector pensions aimed at making public service pensions more sustainable and affordable. A 2018 Court of Appeal judgement (the McCloud judgement) ruled parts of the proposed reforms unlawful. The Committee says the Treasury now wants pension scheme members to pay the estimated £17 billion cost to put that right, despite the reform having been “its own mistake – a mistake which could have been avoided by listening to advice and which will take many decades to resolve.”

Around 25% of pensioners and 16% of the working-age population are members of one of the four largest public service pension schemes covering the armed forces, civil service, NHS and teachers. The schemes are almost all unfunded, meaning retirees’ pension benefits are paid out of current workforce contributions, says the report.

The Committee saw “evidence of public service pensions issues affecting delivery of frontline services, and independent schools opting out of pension schemes because of increasing costs”. It says HM Treasury doesn’t have the data it needs and has not evaluated the impact of its reforms or whether they are achieving its pension policy objectives and that the Committee is “not convinced it is on track”.

Meg Hillier MP, Chair of the Public Accounts Committee, said: “The Treasury’s £17 billion mistake on pensions reform is a ripple compared to the tsunami of costs to the public purse if Government fails to address the growing number of young people unable to afford to plan for a proper pension.

“It’s lack of curiosity about why nearly a quarter of a million workers are not joining these pension schemes is a concern. Pension planning must be long term; mistakes and poor planning have an impact for decades. Short-term cost savings can become long-term costs to individuals with lower retirement incomes and the taxpayer who may end up supporting them.”

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